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The Top 3 Reasons Not to Invest in 90% Junk Silver Coins

The Top 3 Reasons Not to Invest in 90% Junk Silver Coins

90% junk silver coins are a marvelous way to invest in physical silver bullion, but they do have a few major drawbacks that silver stackers and investors should know about.

 

1) Bags of 90% junk silver contain an unsettling percentage of slicks, culls, and dateless coins

 

One of the downsides of buying bags or rolls of constitutional junk silver is that you are dealing with circulated coins.  Not only are the coins circulated, but they are old as well.  In fact, it is common to find Mercury dimes, Standing Liberty quarters and Walking Liberty half dollars in junk silver bags.  These coins were all struck in the 1940s or earlier, making them as much as 100 years old.

And the longer a coin has circulated, the greater the chance it will be impaired in some way.  Now, junk silver is not sold as a numismatic investment, so we’re not looking for perfection here.  But there is a limit to what is acceptable at the same time.

Slick (excessively worn), dateless, holed or otherwise damaged coins often find their way into bags of junk silver sold by the major bullion dealers.  Indeed, these dealers have every incentive not to remove these culls from their bags.  Attempting to do so would not only increase labor costs, but also incur a replacement cost.

So it shouldn’t come as a surprise that a non-trivial percentage of junk silver bags are composed of these impaired silver coins.  I estimate that the typical bag of junk silver contains anywhere from 2% culls all the way up to 10% on the high end. 5% culls is a pretty reasonable average estimate, in my experience.

Now an argument can be made that this doesn’t matter in the grand scheme of things.  After all, circulated junk silver is the absolute cheapest way to buy fractional silver bullion.

In addition, these coins are spotted a wear allowance in the bullion industry.  Although every $1 face value of uncirculated 90% silver should theoretically contain 0.7234 troy ounces, circulated junk silver is assumed to contain just 0.7150 troy ounces – around a 1.2% wear allowance.

A lot of stackers who buy constitutional silver do so because they want to have purchasing power after a destabilizing geopolitical event, such as a natural disaster or economic crash.  In these situations it is assumed that U.S. junk silver will be widely accepted due to its convenient sizes and widespread recognition among the general public.

But how do you think it is going to look when you pull out your junk silver to buy food from a stranger and some of the coins are slicks?  If the other party to the transaction is smart enough to know the value of 90% silver coins, they are also smart enough to know that slick coins will come up light on a scale.

In other words, if you intend to use junk silver as a barter tool, any cull coins you receive in a bag of 90% silver are honestly pretty useless.  You won’t be able to easily pass them in a survival situation, which is the primary reason for buying them in the first place.

Now I do think this disadvantage can be mitigated, albeit with a little bit of extra work and money.  Simply put, you can screen and remove any cull coins from a roll or bag of junk silver you buy.

If you do purchase constitutional silver, I would recommend that you pull out anything holed, badly scratched, excessively dirty, dateless, or in a condition below Good-4 (when you start to lose full rims due to wear).  This will ensure that all the remaining coins retain good weight and eye appeal, which I feel will be imperative in a doomsday scenario.  The coins that you pull will be the junkiest of junk silver, and they can go straight into the smelter’s pot without a single pang of regret (once you check them for rare dates, of course).

 

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2) Constitutional silver is bulkier than .999 fine bullion

 

Many stackers might find this to be an almost laughably minor drawback.  But it might not be so funny once your stack reaches a certain size.

Because junk silver is only 90% fine, you end up owning extra weight compared to an equal amount of .999 fine bars or coins.  In fact, you have to stack an extra 11% gross weight of constitutional silver to achieve the same number of ounces as .999 fine silver.

Your troubles don’t end there, though.  90% silver coins also have a slightly lower density (10.34 gm/cm3) than .999 fine silver (10.49 gm/cm3).  This means that 100 troy ounces of silver will theoretically occupy 296.8 cm3 if purchased in .999 fine form, compared to 334.3 cm3 if bought as junk silver.  So in the final analysis, constitutional silver will take up an additional 12.6% storage volume in your stack.

Now, depending on how you stack, this might be a non-issue.  If you intend to purchase less than 250 troy ounces of junk silver, or about $350 face value, then I don’t think you have anything to worry about.  But if you propose to accumulate many hundreds or even thousands of ounces of constitutional silver, it may contribute to long-term storage issues.

Secure storage space for silver enthusiasts is often at a premium, regardless of whether we are talking about a trusted bank safety deposit box, a stout residential safe or an ingenious home hiding spot.  Although it might not seem like a deal-breaker at first, the extra 12.6% volume required for constitutional silver could eventually prove to be a significant disadvantage versus .999 fine silver coins or bars.

 

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3) Junk silver is slowly losing its benchmark status to the American Silver Eagle

 

From the late 1960s until the early 2000s, $100, $500 and $1,000 face value bags of junk silver were the preferred form of physical silver in the marketplace.  They were universally recognized by the public, completely trusted and readily available in almost any volume you might want or need.

Constitutional silver’s “king of the mountain” status reached its apogee in 1999 during the Y2K Crisis.  During this hysteria, many pundits believed a prevalent date bug in old computer code had the potential to crash our global civilization when the calendar flipped over to January 1, 2000.

Of course, it didn’t happen.  But many panicked investors stockpiled junk silver in anticipation of a possible Mad Max scenario, driving up premiums to more than 50% over spot.

Notice that they (mostly) didn’t buy Canadian Maple Leafs or American Silver Eagles or Sunshine Mint silver bars.  They bought U.S. junk silver.  And they bought it because it was the benchmark by which all other physical silver investments were measured.

But that benchmark status has steadily eroded over the last two decades.  At this point, I think there is equal, perhaps even better, recognizability of government issued silver bullion coins – particularly American Silver Eagles.

This inevitable passing of the torch isn’t really junk silver’s fault.  Every time the price of silver spiked in the past, tens of thousands of bags of 90% silver coins were shipped off to the refiners, never to be seen again.  This happened most notably during the Hunt Brother’s 1980 silver bubble (also referred to as the Great Melt) and more recently with the frothy precious metal market of 2011.  The melting of junk silver happened at other times too, just in smaller quantities.

The effect of all this melting is that there is simply less and less of the constitutional stuff around as time goes by.  The last circulating U.S. 90% silver coinage was minted over 50 years ago at this point.  They simply aren’t making anymore.  As a result, it is slowly getting harder and harder to find the huge numbers of bags that are required to drive institutional-scale liquidity.

The United States Mint has also done its part to accelerate this changing of the guard.  From the inception of the American Silver Eagle program in 1986 until the year 2000, the U.S. Mint struck a grand total of 81 million of the bullion pieces.  But since that time, 424 million of the perennially popular silver coins have been minted.  This, more than anything else, has helped to displace junk silver from its traditional role of silver bullion of first resort.

The next time a major financial crisis unfolds, I think it is a good bet that American Silver Eagles (and possibly other government-issued silver bullion coins) will be the must-have investments for those desperate to own physical silver.  This isn’t to say that junk silver won’t command a healthy premium, but I suspect it will be lower than the new king of the physical silver market.

 

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Before you send me hate mail, I want to make it clear that despite the drawbacks I’ve listed above, I don’t dislike junk silver as an investment.  I’ve owned it in the past.  I own a bit now.  And I’ve seriously considered buying more as silver spot has lingered in the $15 to $16 an ounce range.

I feel that silver is a tremendously undervalued asset at the moment.  And in my opinion, anything that convinces you to protect your financial health by purchasing physical silver is a positive.  If that physical silver happens to come in the form of 90% constitutional silver, then I have no complaints.

 

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Ancient Ptolemaic Bronze Coins

Ancient Ptolemaic Bronze Coins
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We live in an age of striking impermanence.  And yet we occasionally stumble across something that is the antithesis of the ephemeral.  Sometimes an item – a very special item – speaks to us across the void of millennia, connecting us with civilizations long dead.

This is exactly how I feel about the Ptolemaic bronze coins of ancient Egypt.

The Ptolemaic dynasty was a remarkable Hellenistic empire founded by one of Alexander the Great’s finest generals, Ptolemy I.  After Alexander died unexpectedly in 323 BC, Ptolemy I carved an Egyptian kingdom out of the ruins of Alexander’s rapidly disintegrating empire.   By fusing Greek culture with native Egyptian customs, the Ptolemies created the most successful and enduring of Alexander’s successor states.

Ptolemy I’s empire lasted longer than any other major Hellenistic kingdom, only meeting its end in 30 BC after its infamous queen, the cunning seductress Cleopatra, was defeated at the great battle of Actium in the Ionian Sea.  Rather than enduring a humiliating surrender to Rome’s first emperor, Augustus Caesar, Cleopatra instead chose to commit suicide via the poisonous bite of a deadly asp.

Ancient Ptolemaic bronze coins usually display the laureate, ram-horned head of the god Zeus-Ammon on the obverse and a noble eagle (or twin eagles) on the reverse.  Zeus-Ammon was the Hellenistic synthesis of Zeus, the Greek king of the gods, and his horned Egyptian counterpart Ammon.  This merger of Greek and Egyptian culture reflected Ptolemaic policies promoting themselves as the new Pharaohs of Egypt.

There are remarkably few ancient and medieval bronze coins that can be considered investment worthy.  I am of the opinion that only Imperial Roman bronze coinage joins its Ptolemaic peers in meriting serious investment consideration.  Being low denomination pieces, pre-modern bronze coinage was often carelessly minted via sloppy striking with crude dies.  This resulted in poor quality coins that collectors tend to pass up in favor of gold or silver coins.

Fortunately, ancient Ptolemaic bronze coins were a notable exception to this rule.  Dies engraved in the finest Greek style were used to meticulously strike these numismatic masterpieces in magnificently high relief.  In addition, Ptolemaic bronze coins can be enormous, reaching up to 50 millimeters (2 inches) in diameter and 100 grams (3.5 ounces) in weight.

Interestingly, most examples have a small, depressed dimple on the center of both faces of the coin.  This is a commonplace byproduct of the ancient manufacturing process.

When purchasing these marvelous ancient coins it is important to look for examples that are well-centered, well-struck and have a pleasing patina.  Patina is a thin layer of attractive oxidation that accumulates on a bronze coin over the course of centuries.  Although green or brown patinas are most commonly encountered, a myriad of other colors is also possible, including black, red and even blue!

A fine patina not only materially increases the beauty and value of a bronze coin, but also protects it against harmful corrosion as well. This is one of the reasons ancient or medieval bronze coinage should never be cleaned.

Bronze coins were the workhorse denominations of the ancient Mediterranean world, regularly used to purchase life’s necessities like bread, olive oil and wine.  Consequently, surviving specimens tend to be heavily worn.  Therefore, it is imperative to only consider coins with light to moderate wear.

Ancient bronze coins could also circulate for immense lengths of times, causing some pieces to be worn down to little more than smooth metal slugs.  In one anecdotal story, an ancient Imperial Roman bronze coin was found counterstruck with a revaluation mark from 16th century Spain, implying that the piece circulated continuously for approximately 1500 years!

Another key attribute to consider when collecting Egyptian Ptolemaic bronze coins is size.  A bronze coin’s size is expressed in conjunction the abbreviation “AE” – which stands for bronze – followed by a number that reflects the coin’s diameter in millimeters.  As an example, “AE30” would be a bronze coin with a diameter of 30 millimeters.

I consider investment quality Ptolemaic bronze coinage to start at 27 or 28 millimeters in diameter, with specimens over 30 millimeters being preferable.  As you can probably guess, the larger a coin is, the higher its price.  This is understandable, as larger Egyptian Ptolemaic bronze coins were struck in such high relief as to border on being ancient sculpture, rather than merely coins!

An Egyptian Ptolemaic bronze coin portraying the ram-horned god Zeus-Ammon with his wild, windswept hair is the epitome of ancient Greek Hellenistic art.  And yet these timeless coins are still grossly underappreciated in today’s art market.  Investment grade examples start at around $100 and go up to about $500 in price.  Truly magnificent, museum quality coins are uncommon, but will sometimes be offered for sale above $500.

As these coins become more widely acknowledged, prices are certain to rise.  After all, a massive, high-relief bronze coin that captures the ancient cultural amalgamation of Hellenistic Greece and Pharaonic Egypt is a work of art to be coveted.

 

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What Makes a Good Numismatic Investment?

What Makes a Good Numismatic Investment?
Photo Credit: Tom Woodward

What makes a good numismatic investment?  What makes one collectible coin steadily increase in value year after year, while another languishes in price for decades at a time?  It is a deceptively simple question.  But the correct answer could ensure windfall profits for the savvy hard asset investor.

In order to properly explore this question, we first need to define what makes a coin desirable.  In reality, coins are miniature works of art struck on tiny metal blanks.  And like any other artwork, the best coins are impressive, imparting a deep sense of beauty and gravitas to the viewer.

Although there are a number of subjective features that can endow a coin with eye appeal, there are also some that are thankfully objective in nature.  The quintessential numismatic investment will tend to share these desirable objective traits.

First on the list is size.  The diameter of a coin is analogous to the size of an artist’s blank canvas.  It is hard for a painter to produce a masterpiece on canvas that is 6 inches by 6 inches.  Likewise, it is difficult for a die engraver to cram a compelling design onto a coin that is only the size of a U.S. dime – 17.9 mm across.

It is the behemoths of the coin world that really wow us.  People are absolutely smitten with large coins, like old silver dollars and pre-1933 gold double eagles.  And it is easy to see why.  These remarkable coins are not only dripping with history, but also luxuriously massive.

And this trend holds true if we examine ancient coins, too.  It is the chunky Athenian tetradrachms and substantial Roman sestertii that fire the imagination of Classical numismatic enthusiasts.

Of course, size isn’t everything.

The metal that a coin is struck from is every bit as important as its size – perhaps even more so.  The rule of thumb is very simple here: the more valuable the metal, the more desirable the coin.  So gold, the king of metals, sits atop our numismatic investment hierarchy, followed by the other metals.

All else being equal, a coin struck in gold is more valuable than the same coin minted in silver.  And the same holds true for silver versus bronze.  This is because precious metals hold an eternal charm that transcends time and culture.

In addition, coins struck in gold and silver are higher denomination pieces that were more likely to have circulated among important people and institutions.  For instance, a medieval British gold noble coin of King Edward III, might actually have been held by Edward III!  And although there is no way to know for certain who might have touched which coin, a good numismatic investment always has a bit of whimsy or fairy tale in it.

Speaking of ancient and medieval coins, age is also a factor in numismatic desirability.  A very old coin allows the viewer to cross a metaphorical sea of time and connect emotionally with a past culture.  In my opinion, however, age usually has a relatively modest impact on a coin’s desirability, especially compared to size or composition.

So when we put all of these attributes together, what do we get?  What kind of coins are a good numismatic investment?

Simply put, you want to buy relatively large coins that are made out of silver or almost any size coin that is made out of gold.  Lastly, older is better than newer, although only marginally.

We can check our thesis by examining the U.S. rare coin market.  Which types of coins are most popular with collectors and command the highest prices.  If we ignore ultra-rarities and key dates, we find that pre-1933 gold coins, old silver dollars and many varieties of silver half dollars stand above other types of U.S. coins in terms of desirability.  In addition, older pieces, such as late 18th and very early 19 century coins from the early years of the U.S. Republic, have an added dimension of desirability.

So if you are looking to make a numismatic investment, large coins struck from precious metal are the way to go from a big picture point of view.

I do understand that there are very dedicated niche collector groups for Indian Head pennies, Mercury dimes, Buffalo nickels and many other smaller U.S. coin series.  But personally, as an investor, I would leave these coins to the collectors.  They lack the necessary “wow” factor for investment purposes.

So where do I see value in U.S. coins right now?  Well, I very much like AU-58 NGC and PCGS certified pre-1933 U.S. gold coins that possess good eye appeal.  AU-58 coins are usually significantly less expensive than MS-60 to MS-62 examples, but typically look much better than them.  This makes many series of AU-58 coins potentially good investments.  I would, however, avoid gold dollar coins as I think these are far too small with a diameter of only 13 mm (0.51 inches) to 15 mm (0.59 inches).

In addition, I think that slabbed Morgan silver dollars in MS-63 or better condition are finally poised to ascend in value after moving sideways for the last 25 years.  Morgan silver dollars have everything going for them.  They are large, photogenic coins with a stellar design that really encapsulates the romance of the American Old West.  And with the exception of the anomalous 1921 date, they are all well over 100 years old at this point.

I also have a surprise sleeper hit: proof American gold and silver eagle bullion coins.  50 years in the future, no one will want to own most U.S. coinage from the 1970s or later.  This is because silver was removed from circulating U.S. coins in the 1960s, leaving us with a miserable base-metal token coinage.  Instead, American gold and silver eagle bullion coins issued from the 1980s onwards will be seen as the only convincing numismatic investment of the period.

American eagle bullion coins are struck by the U.S. Mint from pure, .999 fine silver and 22 karat, .917 fine gold.  The collector’s proof versions are not only struck multiple times to ensure a crisp, frosted finish, but are also much scarcer than the run-of-the-mill uncirculated bullion variety.  They are appropriately massive as well; a 1 troy ounce American silver eagle coin is both heavier and larger than a Morgan silver dollar.

What makes a good numismatic investment?  It is a question well worth asking – and one that I hope I’ve helped you answer.

 

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Information Asymmetry and Antique Investing

Information Asymmetry and Antique Investing
Photo Credit: Eric Golub

I recently looked up a stock quote for Tesla, the luxury electric car manufacturer that everyone either loves or hates.  I happen to hate it.  In any case, its stock was trading for around $300 a share, which really got me thinking.

When Tesla finally files for bankruptcy, I was curious as to how much wealth will be destroyed.  Now I use the term “wealth” very loosely here because the value of Tesla’s physical and intellectual property will not be extinguished in a bankruptcy, just transferred to different owners.  But the value of that property will be far lower than the current market value of all of Tesla’s outstanding securities.

In order to calculate this, I needed a number called enterprise value, or EV for short.  The enterprise value of a company is the sum of a firm’s stock, debt and preferred equity market cap minus its cash balance.  It is, more or less, the total net value that the market currently assigns to a company.

Tesla’s EV turned out to be a mind-blowing $59 billion.  I describe this number as mind-blowing because in the event of bankruptcy, Tesla’s tangible and intangible property will probably have a value of no more than $5 billion.  That number could be significantly lower, too, – perhaps just $1 or $2 billion – if we happen to be in a recession when the firm finally collapses.

All that “wealth” between Tesla’s current $59 billion EV and its theoretical $5 billion liquidation value is effectively imaginary, and will eventually disappear.

But as interesting as this might be, it isn’t the crux of my article.

You see, I looked up Tesla’s enterprise value by opening up my computer’s web browser and navigating to the EDGAR website.  EDGAR is the SEC’s electronic database of company filings.  It took me a grand total of 3 minutes to find the pertinent data from Tesla’s latest quarterly report.

This is actually quite remarkable if you stop to think about it.  Investors today have almost unlimited amounts of information at their fingertips.  Do you want to know the latest depreciation numbers for some obscure penny stock?  No problem.  It is available at zero cost, other than a couple minutes of your time.

Before electronic SEC filings became mandatory in 1998, important financial data was much harder to get.  In those days, if you wanted to know a specific tidbit of data, you actually had to visit the SEC and pull a paper filing from their archives.  In fact, back in the 1970s and 1980s some investment firms used to maintain satellite offices in Washington, D.C. just for the sake of being able to access corporate filings before anyone else.

The idea that some investors might know important facts about a security or investment that other investors don’t is called information asymmetry.  And it is almost universally considered a bad thing in both economics and investing.

In 1970, the economist George Akerlof wrote a famous paper about information asymmetry titled The Market for Lemons: Quality Uncertainty and the Market Mechanism.  This groundbreaking study examined a hypothetical used car market where only the sellers know if the vehicles they are offering are “bad” lemons or “good” peaches.

Because car buyers don’t know if any specific used car is good or bad, they will only be willing to bid lower, “lemon” prices.  As a result, higher quality, “peach” cars will be withdrawn from the market as they cannot command a fair price.  Bad used cars will drive good used cars out of the market.

But is information asymmetry really universally bad?  Today, all investors have access to just about every piece of information available about any conventional asset.  Nobody has a definitive information edge (unless you have your nation’s central banker on speed-dial).

However, instead of ushering in an investing golden age, the lack of modern information asymmetry has contributed to indiscriminate speculation and serial asset bubbles.  The reason for this is because mountains of quickly and easily available data give investors a false sense of security about their investment decisions.

Investors in high-flying stocks implicitly believe that the companies they hold must be worth their current market value.  After all, don’t all these firms file timely and accurate financial statements that are instantaneously available?  If any of these public filings revealed embarrassing or damaging information, wouldn’t the market instantly react to these revelations by immediately punishing the company’s stock price?

In a word, no.  Currently, investors are supremely confident that they are making all the right moves.  A lack of information asymmetry only emboldens them.  They do not stop to think that maybe somebody knows something they don’t.  The absence of information asymmetry breeds investor complacency.

Luckily, I believe there a simple solution to this problem – diversify into markets that still retain a degree of information asymmetry.  This will help ensure that you purchase assets at a reasonable price.

And right now no market has more information asymmetry than the antiques market.

Let me just give you an example.  The British Royal Mint has struck proof versions of their gold Britannia bullion coins from 1987 until the present.  These beautiful coins feature the shield and trident wielding goddess Britannia (the personification of Great Britain) on their reverse and the bust of Queen Elizabeth II on their obverse.

But there is a little-known fact about proof gold Britannias.  Even though they are modern coins struck by a first-class national mint, it is almost impossible to find their mintage numbers.  This example of information asymmetry is interesting because most modern bullion coins are struck in large numbers, rendering them less than ideal for collectors.

But British proof gold Britannias are a little known exception to this rule.  Although you can’t pin down the exact mintages, in most instances the series is incredibly rare.  Most proof gold Britannia coins have mintages of just a few thousand specimens.  Some have mintages that are even lower – in the hundreds!  This is a shocking level of scarcity in a world where commemorative coins are often struck by the millions.

And yet these masterpieces of modern coinage generally sell for no more money than generic gold bullion coins.  The market completely disregards their proof quality, great design and extreme rarity.  And I attribute this pricing anomaly solely to information asymmetry.  Gold proof Britannias are simply so rare that people don’t know they are rare!

Although I’ve used gold proof Britannias as an illustration, there are many other areas in the antiques market where information asymmetry – rightly or wrongly – suppresses the prices of items.  Savvy investors are aware of this phenomenon and take full advantage of it.  You should too.

 

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